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International sales contract law not decisive in proprietary disputes

A recent judgment of the 's-Hertogenbosch Court of Appeal confirmed the principle that the law governing an international sales contract is not decisive for determining questions of proprietary law.(1) This is one of the first decisions of a Dutch appeal court involving the specific conflict of laws provisions in Book 10 of the Civil Code.

Dispute

The dispute involved the purchase by a Dutch buyer of a number of construction machines from a Turkish company. A different Turkish company, however, claimed to be the rightful owner of the goods, maintaining that the machines had been stolen and sold to the Dutch buyer by a party not having title to – and lacking the authority to rightfully dispose of – the machines.

District court ruling

The district court ruled on the applicable law issue on the basis of the old conflict of laws rules which applied before Book 10 of the Civil Code entered into force in 2012. It strictly maintained the separation between the law applicable to the mutual obligations of the parties and the law applicable to the proprietary aspects of the goods in question.

Appeal court decision

The ruling was upheld by the appeal court, which found that under Book 10 of the Civil Code the proprietary issues in relation to the goods should be assessed not in accordance with the law applicable to the sales contract as per the EU Rome I Regulation, but with the law of the country where the goods were located at the materially relevant time. In this case, that time was deemed to be the moment of delivery in Turkey, the country where the goods were delivered to the Dutch buyers. Consequently, Turkish law was to apply to the proprietary issues.

Both the district court and the appeal court specifically separated the law applicable to the contract and that applicable to the proprietary issues. The appeal court expressly invoked Book 10 of the Civil Code, with the result that Turkish – and not Dutch – law applied.

Choice of law clauses

In most international contracts on the sale of goods, the seller and the buyer include a choice of law clause. The common perception is that such clauses implicitly provide a certain type of security when things go wrong and parties may wish to effect a transfer of ownership or invoke a retention of title clause or establish security rights against the goods. Banks which finance international trade will also typically protect their position by including security rights in their finance contracts, always subject to the law chosen in that contract.

Security status

However, the question arises of how secure such security really is. All commercial interests in the international supply chain (eg, traders, banks and carriers) should be aware of the fact that, when deciding questions of proprietary law in an international setting, the law applicable to the underlying contract will in most cases be irrelevant. In the event that a dispute arises, the rights of such commercial interests might conflict. The goods are the only thing that all these parties have in common, and the point at issue is whether the potentially conflicting rights to the goods will move with the goods themselves throughout the course of their international transit.

Rotterdam is a major global hub for international trade and goods consigned there are frequently the subject of disputes between conflicting interests. In the event that a dispute arises involving goods within Dutch jurisdiction, the Dutch courts (despite the subjectively or objectively determined national law governing the underlying contacts) will in principle apply national substantive law to determine who can lawfully exercise the rights to goods which are physically present in the Netherlands.

The principal rule, based on Book 10 of the Civil Code as introduced in 2012, is that in an international setting, proprietary issues with regard to goods are governed by the law of the country where the goods are located. For specific security rights, such as retention of title and liens and the proprietary aspects of goods in transit, there is a set of tailormade statutory provisions based on this principal rule. This may lead, for example, to a situation where unpaid sellers that want to rely on contractually agreed reservation of title will nonetheless have their claim assessed on the basis of the law of the country where the goods were situated at the time of delivery.

Comment

In cargo conflicts whereby creditors either effect pre-judgment attachments on goods present in the Netherlands or exercise other forms of security right (eg, retention, lien, pledge) on goods within Dutch jurisdiction, when deciding whether a creditor's right is properly exercised, the governing law of the underlying contract will not automatically provide the comfortable and secure position that the creditor was hoping for when concluding the contract.

Commercial interests should be aware that reliance purely on contractual terms may lead to surprising and unwanted results when a dispute comes before the Netherlands courts after the goods have, for example, been arrested within Dutch jurisdiction.

Compare jurisdictions: Litigation: Enforcement of Foreign Judgments

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